Several indicators that pointed to upside for US stocks this year have shifted to a more neutral outlook, potentially leaving equities vulnerable to turbulence from a recent surge in bond yields and worries over China’s economy, according to investors.
Some investors watch so-called contrarian indicators to gauge the market's mood, with extreme pessimism thought to be a good sign to buy and vice versa.
At the start of the year, measures such as stock positioning and allocations to cash showed extreme bearishness, reflecting investors' grim outlook following a brutal sell-off in 2022 and expectations of a recession in the second half of this year.
But signs of a resilient economy and cooling inflation drew investors off the sidelines and bolstered risk appetite in the months that followed, fuelling an almost 14 per cent rise in the S&P 500 this year. The upshot, some believe, is that there is now less cash on the sidelines to drive further gains and fewer sceptical investors to win over.
While bearish positioning was a “strong tailwind” for risk assets in the first half of 2023, that’s “not the case” in the second half, strategists at BofA Global Research wrote in a report this week.
The bank’s survey of fund managers showed cash allocations dropped to 4.8 per cent in August, the lowest level in 21 months. That shifted its “cash rule” indicator – which stands at “buy” when allocations are above 5 per cent, to “neutral”.
The survey also showed fund managers at their least bearish since February 2022.
Bearishness among retail investors, meanwhile, is at half the levels seen in September 2022, according to the AAII Sentiment Survey.
“There was plenty of pessimism in the market earlier this year and that shift from pessimism to optimism was fuel for a rally,” said Willie Delwiche, a strategist at Hi Mount Research. “We saw it quickly go from too much pessimism to excessive optimism, and now we are starting to see that roll over.”
Investors are looking ahead to the Federal Reserve's annual symposium in Jackson Hole, Wyoming, at the end of next week for further insight into how long the central bank intends to leave rates around current levels.
The surge of optimism that helped fuel stocks is being tested this month, though it remains to be seen whether investors will see the declines as an opportunity to buy on the cheap or a signal to lighten up on stocks.
The S&P 500 is down more than 5 per cent from its intraday high in late July while yields on the benchmark US 10-year Treasury on Thursday hit their highest since October. US real yields, which show what investors can expect to earn on Treasuries after adjusting for inflation, stand near their highest since 2009.
Higher yields on Treasuries, which are seen as virtually risk-free since they are backed by the US government, can make stocks less appealing to investors, especially since equity valuations are high by historical standards.
At the same time, anxiety over China’s worsening property crisis and its impact on the country’s weakening economy has grown after embattled developer China Evergrande Group filed for US bankruptcy protection this week.
The market, if anything, might not be bullish enough in the short to medium term. The time to get bearish is not today
Steve Chiavarone,
senior portfolio manager at Federated Hermes
“The market is particularly vulnerable right now” due to the surge in bond yields and concerns over contagion in the Chinese property sector, said Quincy Krosby, chief global strategist at LPL Financial.
She expects stocks to remain volatile until companies start announcing third-quarter earnings in October. Should the market stabilise, investors will be likely to reallocate more cash to stocks later in the year, she said.
Of course, while optimism has grown, it is still far from extreme, and cash levels are far from historical lows.
Bullish investors have taken heart from signs that the US economy is likely to avoid recession this year, even as inflation has cooled and the Fed is unlikely to raise interest rates much further.
Steve Chiavarone, senior portfolio manager at Federated Hermes, recently increased allocations to sectors such as energy and materials in anticipation of more economic growth.
“The market, if anything, might not be bullish enough in the short to medium term,” Mr Chiavarone said.
His firm’s research has found that historically the S&P 500 has gained an average of 14% during pauses to Fed tightening.
“The time to get bearish is not today,” he said.
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Sri Lanka World Cup squad
Dimuth Karunaratne (c), Lasith Malinga, Angelo Mathews, Thisara Perera, Kusal Perera, Dhananjaya de Silva, Kusal Mendis, Isuru Udana, Milinda Siriwardana, Avishka Fernando, Jeevan Mendis, Lahiru Thirimanne, Jeffrey Vandersay, Nuwan Pradeep, Suranga Lakmal.
Uefa Nations League: How it works
The Uefa Nations League, introduced last year, has reached its final stage, to be played over five days in northern Portugal. The format of its closing tournament is compact, spread over two semi-finals, with the first, Portugal versus Switzerland in Porto on Wednesday evening, and the second, England against the Netherlands, in Guimaraes, on Thursday.
The winners of each semi will then meet at Porto’s Dragao stadium on Sunday, with the losing semi-finalists contesting a third-place play-off in Guimaraes earlier that day.
Qualifying for the final stage was via League A of the inaugural Nations League, in which the top 12 European countries according to Uefa's co-efficient seeding system were divided into four groups, the teams playing each other twice between September and November. Portugal, who finished above Italy and Poland, successfully bid to host the finals.
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What is blockchain?
Blockchain is a form of distributed ledger technology, a digital system in which data is recorded across multiple places at the same time. Unlike traditional databases, DLTs have no central administrator or centralised data storage. They are transparent because the data is visible and, because they are automatically replicated and impossible to be tampered with, they are secure.
The main difference between blockchain and other forms of DLT is the way data is stored as ‘blocks’ – new transactions are added to the existing ‘chain’ of past transactions, hence the name ‘blockchain’. It is impossible to delete or modify information on the chain due to the replication of blocks across various locations.
Blockchain is mostly associated with cryptocurrency Bitcoin. Due to the inability to tamper with transactions, advocates say this makes the currency more secure and safer than traditional systems. It is maintained by a network of people referred to as ‘miners’, who receive rewards for solving complex mathematical equations that enable transactions to go through.
However, one of the major problems that has come to light has been the presence of illicit material buried in the Bitcoin blockchain, linking it to the dark web.
Other blockchain platforms can offer things like smart contracts, which are automatically implemented when specific conditions from all interested parties are reached, cutting the time involved and the risk of mistakes. Another use could be storing medical records, as patients can be confident their information cannot be changed. The technology can also be used in supply chains, voting and has the potential to used for storing property records.
Premier League results
Saturday
Tottenham Hotspur 1 Arsenal 1
Bournemouth 0 Manchester City 1
Brighton & Hove Albion 1 Huddersfield Town 0
Burnley 1 Crystal Palace 3
Manchester United 3 Southampton 2
Wolverhampton Wanderers 2 Cardiff City 0
West Ham United 2 Newcastle United 0
Sunday
Watford 2 Leicester City 1
Fulham 1 Chelsea 2
Everton 0 Liverpool 0
Pharaoh's curse
British aristocrat Lord Carnarvon, who funded the expedition to find the Tutankhamun tomb, died in a Cairo hotel four months after the crypt was opened.
He had been in poor health for many years after a car crash, and a mosquito bite made worse by a shaving cut led to blood poisoning and pneumonia.
Reports at the time said Lord Carnarvon suffered from “pain as the inflammation affected the nasal passages and eyes”.
Decades later, scientists contended he had died of aspergillosis after inhaling spores of the fungus aspergillus in the tomb, which can lie dormant for months. The fact several others who entered were also found dead withiin a short time led to the myth of the curse.
Despacito's dominance in numbers
Released: 2017
Peak chart position: No.1 in more than 47 countries, including the United States, the United Kingdom, Australia and Lebanon
Views: 5.3 billion on YouTube
Sales: With 10 million downloads in the US, Despacito became the first Latin single to receive Diamond sales certification
Streams: 1.3 billion combined audio and video by the end of 2017, making it the biggest digital hit of the year.
Awards: 17, including Record of the Year at last year’s prestigious Latin Grammy Awards, as well as five Billboard Music Awards
UPI facts
More than 2.2 million Indian tourists arrived in UAE in 2023
More than 3.5 million Indians reside in UAE
Indian tourists can make purchases in UAE using rupee accounts in India through QR-code-based UPI real-time payment systems
Indian residents in UAE can use their non-resident NRO and NRE accounts held in Indian banks linked to a UAE mobile number for UPI transactions
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SCORES IN BRIEF
Lahore Qalandars 186 for 4 in 19.4 overs
(Sohail 100,Phil Salt 37 not out, Bilal Irshad 30, Josh Poysden 2-26)
bt Yorkshire Vikings 184 for 5 in 20 overs
(Jonathan Tattersall 36, Harry Brook 37, Gary Ballance 33, Adam Lyth 32, Shaheen Afridi 2-36).
Jigra
Starring: Alia Bhatt, Vedang Raina, Manoj Pahwa, Harsh Singh
